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Fiscal Discipline and Asymmetric Adjustment of Revenues and Expenditures: Local Government Responses to Shocks in Denmark

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  • Jørn Rattsø

    (Norwegian University of Science and Technology)

  • Per Tovmo

    (Norwegian University of Science and Technology)

Abstract

Fiscal discipline is a concern because of possible spending and deficit bias in fiscal and political institutions. This study investigates adjustments under fiscal federalism, concentrating on decentralized government in Denmark and allowing for a comparison with neighbors Norway and Sweden and with similar analyses of U.S. states. Fiscal adjustments are investigated as responses to shocks measured as deviations from budgeted current surplus. The econometric results show that local governments respond by compensating adjustment of tax rates and expenditures. The shock responses tend to be asymmetric. Positive shocks hardly affect the income tax rate, whereas negative shocks induce higher tax rates. The authors interpret the asymmetry as the result of spending pressure due to redistributive politics and show that political characteristics are important for tax determination. They conclude that the Danish design of controlling the local public sector avoids fiscal imbalances but allows a bias toward expansion.

Suggested Citation

  • Jørn Rattsø & Per Tovmo, 2002. "Fiscal Discipline and Asymmetric Adjustment of Revenues and Expenditures: Local Government Responses to Shocks in Denmark," Public Finance Review, , vol. 30(3), pages 208-234, May.
    • Handle: RePEc:sae:pubfin:v:30:y:2002:i:3:p:208-234
    DOI: 10.1177/109114210203000303
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    2. Christofzik, Désirée I. & Schneider, Benny, 2019. "Fiscal policy adjustments to budget shocks: Evidence from German municipalities," Working Papers 10/2019, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    3. Nakatani, Ryota, 2023. "Revenue Decentralization and the Probability of a Fiscal Crisis: Is There a Tipping Point for Adverse Effects?," MPRA Paper 119032, University Library of Munich, Germany.
    4. Lenka Maličká, 2017. "Determinanty zadĺženosti miestnych samospráv Slovenskej republiky [Determinants of the Municipal Indebtedness in the Slovakia]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(3), pages 301-315.
    5. John Ashworth & Emma Galli & Fabio Padovano, 2013. "Decentralization as a constraint to Leviathan: a panel cointegration analysis," Public Choice, Springer, vol. 156(3), pages 491-516, September.
    6. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).
    7. Bharatee Dash & Angara Raja, 2014. "Do political determinants affect revenue collection? Evidence from the Indian states," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(3), pages 253-278, September.
    8. Niklas Potrafke, 2006. "Political Effects on the Allocation of Public Expenditures: Empirical Evidence from OECD Countries," Discussion Papers of DIW Berlin 653, DIW Berlin, German Institute for Economic Research.
    9. Benoît LE MAUX & Kristýna DOSTÁLOVÁ & Antti MOISIO, 2017. "Do political parties matter? Endogenous fragmentation, partisanship, and local public expenditures in Finland," Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS 2017-02-ccr, Condorcet Center for political Economy.
    10. Cabaleiro Casal, Roberto & Buch Gómez, Enrique J. & Vaamonde Liste, Antonio, 2014. "Financial Situation And Political Parties In Local Governments: Empirical Evidence In The Spanish Municipalities / Situación Financiera Y Partidos Políticos En Los Gobiernos Locales: Evidencia Empíric," Investigaciones Europeas de Dirección y Economía de la Empresa (IEDEE), Academia Europea de Dirección y Economía de la Empresa (AEDEM), vol. 20(3), pages 110-121.
    11. Ergete Ferede, 2018. "Alberta’s Fiscal Responses to Fluctuations in Non-Renewable-Resource Revenue," SPP Briefing Papers, The School of Public Policy, University of Calgary, vol. 11(23), September.
    12. Benoît Le Maux & Yvon Rocaboy, 2016. "Competition in fragmentation among political coalitions: theory and evidence," Public Choice, Springer, vol. 167(1), pages 67-94, April.
    13. Lopes da Fonseca, Mariana, 2017. "Political determinants of municipal accounts: Quasi-experimental evidence from Portugal," University of Göttingen Working Papers in Economics 238, University of Goettingen, Department of Economics, revised 2017.

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